China Producer Prices Jump On Further Evidence Of Global Reflation
James Woods | Jan 11, 2017 10:51
Originally published by Rivkin Securities
Chinese data on Tuesday provided further evidence to support the trend of global reflation as consumer prices (YoY Dec) rose +2.1% although slightly below expectations for a reading of +2.2%. The big surprise to the upside was the producer price index which is a leading indicator for consumer prices. The measure of wholesale costs rose +5.5% well above the +4.6% forecast and previous reading of +3.3% with the chart below showing the recent surge after prices remain negative four years.
The increases are primarily a result of stimulus measures in early 2016 which have filtered their way through the system slowly while at the same time commodity prices have soared thanks to supply side reforms in China to clean up inefficient production. Commodities once again benefited from the news and further promises to clean up supply in China, with Dallian Iron Ore futures surging 8% on Tuesday while the spot price rose +1.9% to US$77.73 and copper gained +2.91%.
Given China is the world’s exporter changes in their prices are very important. For years China was seen as exporting deflation to other countries as a result of lower prices however we should see these prices rises slowly work their way through into global inflation. This will add to the shift we are seeing in global equity markets away from defensive sectors such as utilities, telecommunications and healthcare into more cyclical sectors such as consumer discretionary, financials and basic materials which tend to perform better as the economy improves.
Higher commodity prices helped boost the FTSE100 to a new record high for the ninth session in a row up +0.52% at 7,275.47 with the biggest performing sector basic materials which gained +3.99% thanks to heavy weights Anglo American (LON:AAL) (+7.19%), BHP Billiton PLC (LON:BLT) (+4.44%) and Rio Tinto PLC (LON:RIO) (+5.12%).
Elsewhere global equity markets were little changed, the Euro Stoxx 600 was +0.11% higher, as was the DAX +0.17% while in the US the S&P 500 was unchanged while the Nasdaq 100 posted modest gains of +0.20%. In currencies the U.S. dollar index posted modest gains of +0.09% thanks to a -0.15% decline in the EUR/USD, while the AUD/USD gained +0.19% as did the JPY/USD +0.23% and the GBP/USD was flat up just +0.03%.
Precious metals continue to move up from their December lows with spot gold and silver up +0.40% and +1.36% overnight while spot gold in Australian dollars rose +0.25%. There is a decent positive correlation between the price of spot gold in USD and the Australian dollar, meaning they typically move in the same direction. The second chart below shows this hedging effect for those who have gold exposure in Australian dollars.
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Locally the S&P/ASX 200 index was lower, down -0.80% at 5,760.70 meaning this morning we can expect a stronger start to trading with ASX SPI200 futures up +26 points in overnight trading.
h2 Data releases:/h2· U.K. Trade Balance (MoM Nov) 8:30pm AEDT
· U.K. Manufacturing Production & Construction Output (MoM & YoY Nov) 8:30pm AEDT
· BOE Governor Mark Carney Testifies Before Lawmakers 1:15am AEDT
· U.S. Crude Oil Inventories (Jan 6th) 2:30am AEDT
Chart 1 – Chinese Producer Prices
Chart 2 – XAUUSD (Blue) & AUDUSD (Purple)
Source: Rivkin, RivkinTrader, TradingEconomics.com
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